Interim Results For the period ended 30 September 2018 - Nationwide Building ...
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Interim Results For the period ended 30 September 2018
Nationwide Building Society – Interim Results
Contents
Page
Key highlights and quotes 3
Financial summary 5
Chief Executive’s review 6
Financial review 8
Business and risk report 14
Consolidated interim financial statements 47
Notes to the consolidated interim financial statements 53
Responsibility statement 78
Independent review report 79
Other information 80
Contacts 80
Introduction
Unless otherwise stated, the income statement analysis compares the period from 5 April 2018 to 30 September 2018 to the corresponding six
months of 2017 and balance sheet analysis at 30 September 2018 with comparatives at 4 April 2018.
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 9. Statutory profit before tax of £516 million has been adjusted to
derive an underlying profit before tax of £460 million. The purpose of this measure is to reflect management’s view of the Group’s underlying
performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable
levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct
consequence of) the Group’s core business activities. The components of underlying profit have changed in the period to more accurately reflect
underlying performance. For more information see page 9 of the Financial Review.
Nationwide has developed a financial performance framework based on the fundamental principle of maintaining its capital at a prudent level in
excess of regulatory requirements. The framework provides parameters which allow it to calibrate future performance and help ensure that it
achieves the right balance between distributing value to members, investing in the business and maintaining financial strength. The most
important of these parameters is underlying profit which is a key component of Nationwide’s capital. We believe that a level of underlying profit of
approximately £0.9 billion to £1.3 billion per annum over the medium-term would meet the Board’s objective for sustainable capital strength. This
range will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend
on a number of external and internal factors, including conscious decisions to return value to members or to make investments in the business. It
should not be construed as a forecast of the likely level of Nationwide’s underlying profit for any financial year or period within a financial year.
Forward looking statements
Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position,
business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward-looking statements
are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature,
all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of
Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation
in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower
credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within
relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions
in which Nationwide operates. As a result, Nationwide’s actual future financial condition, business performance and results may differ materially
from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties Nationwide
cautions readers not to place undue reliance on such forward-looking statements.
Nationwide undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the
United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of
a prospectus that may be obtained from Nationwide and will contain detailed information about Nationwide and its management as well as
financial statements.
2 of 80Nationwide Building Society – Interim Results
Nationwide reports strong trading and announces intention to launch current account for small businesses
Intends to launch a business banking current account, bringing Nationwide’s service and value to small businesses
Helped 1 in 5 first time buyers; grew member deposits by £5.1bn; more people chose Nationwide for current accounts
than any other high street brand1
Returned £330m to members in member financial benefit
Profitability in line with expectations as Society invests for the future
Underlying profit of £460m (H1 2017/18: £589m) and statutory profit of £516m (H1 2017/18: £628m), in line with
expectations
Profits are after a charge of £135m from asset write-offs and incremental technology spend as Society increases
investment to meet members’ future needs
Costs flat, excluding asset write-offs and additional technology investment; on track for £100m sustainable saves in
2018/19
UK leverage ratio of 5.0% (4 April 2018: 4.9%); CET1 ratio at 31.7% (4 April 2018: 30.5%)
Investing and innovating for members
Over the next five years, Society to invest an additional £1.3bn in technology (announced in September), taking total
investment in the Society to £4.1bn over this period
Intention to launch business banking current account, bringing leading service, scale and mutuality to small businesses
Remain committed to £350m in ongoing investment programme in branch network
Rewarded members with £330m in member financial benefit
Members benefited from better rates, fees and incentives including an additional £250m (H1 2017/18: £180m) in deposit
interest compared to the market average
Members chose to do more with us: engaged members increased to 9.1m (March 2018: 8.9m) and committed members
to 3.3m (March 2018: 3.2m)2
No 1 for service and trust
Number one for customer satisfaction among our high street peer group with a lead of 4.2% (March 2018: 4.6%)3
Joint fifth in the Institute of Customer Service’s UK Customer Satisfaction Index of all sectors, up from joint seventh
The UK’s most trusted financial brand4
Provided members with average deposit rates more than 50% higher than the market average5
Grew member deposits6 by £5.1bn (H1 2017/18: £1.8bn)
595,000 people opened the new Single Access and Loyalty ISAs (H1 2017/18: 535,000); Nationwide attracted 66%
market share of the growth in ISA deposits
Market share of stock of deposits maintained at over 10%
Helped more people into a home, including a record 40,500 first time buyers
Total gross mortgage lending up to £17.3bn (H1 2017/18: £16.7bn)
Maintained share of stock of lending in a competitive mortgage market at 13.0% (March 2018: 12.9%)
1 in 5 first time buyers chose a Nationwide mortgage - a record 40,500 (H1 2017/18: 39,500)
More people opened current accounts with the Society than any other high street brand1
399,000 new current accounts opened by Nationwide (H1 2017/18: 427,000), maintaining market share of openings1
1 in 5 of all switchers moved to Nationwide; market share of switchers increased to 21.5% (H1 2017/18: 20.2%)7
Market share of stock of main standard and packaged current accounts maintained at 7.9%8
1 Sources: CACI (Apr-Aug 2018) and eBenchmarkers (Apr-Sep 2018).
2 Engaged members are those who have their main personal current account with us, a mortgage with a balance greater than £5,000, or a savings account with a balance greater than
£1,000. Before 2018/19, the savings threshold was £5,000. On the previous measure, there were 8.1 million engaged members at 31 March 2018. Committed members are those with an
engaged membership product plus at least one other product.
3 © GfK 2018, Financial Research Survey (FRS), 12 months ending 30 September 2018 and 12 months ending 31 March 2018, proportion of extremely/very satisfied customers minus
proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account
market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
4 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 12 months ending September 2018. Financial brands
included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
5 Market average interest rates are based on Bank of England whole of market average interest rates, adjusted to exclude Nationwide’s balances.
6 Member deposits includes current account credit balances.
7 Source: CASS BACS Payments Schemes monthly CASS switching market data (Apr-Sep 2018).
8 Source: CACI (Aug 2018).
3 of 80Nationwide Building Society – Interim Results
Joe Garner, Chief Executive, Nationwide Building Society, said:
“Nationwide Building Society exists to serve our members, communities and society. In the last six months, we have continued to
grow strongly, our members have continued to benefit from competitive rates, attractive products and leading service, and we have
improved our already robust financial position. The strength of our business means we are well placed to invest confidently in the
future of the Society, and we have committed to invest an additional £1.3 billion over the next five years to transform our technology
estate and capabilities. This will take our total investment over the next five years to £4.1 billion and will ensure the Society makes
the most of the opportunities ahead. We will develop new propositions, further enhance our service, simplify our operations and
build new skills for the future.
“This conscious decision to increase our investment is underpinned by the continued strength of our performance over the last six
months. We continue to lead our high street peer group for customer satisfaction by a significant margin1. We protected savers and
rewarded loyal members, delivering £330 million in member financial benefit through better rates, fees and incentives than the
market average over the half year. The special rate ISA, available exclusively to our loyal members, contributed to a £5.1 billion rise
in deposits. We continued to support first time buyers, helping a record 40,500 into a home of their own – 1 in 5 of all first time
homeowners. And more people are choosing Nationwide for their everyday finances, with almost 400,000 current accounts opened
with us so far this year.
“Our success in the personal current account market, where we have grown accounts by 70% in the last five years, has given us the
confidence to accelerate our entry into the business banking market. The funding available from the Banking Competition Remedies
remains important to us as it will allow us to bring our proposition to market faster and with greater impact. 50,000 members a
year ask us to provide business banking, and we believe we can offer a compelling mutual alternative to Britain’s currently
underserved 5.6 million small businesses. Nationwide is here for the long term and we believe we can make a lasting difference in
this market, as we have in the personal current account market, thanks to the combination of leading service and good value we
can offer. This is the logical next step in bringing mutuality to more people.
“Our first half profits were lower than last year because we have chosen to increase our investment in the future of our Society. As
a mutual, we do not judge our success by profit growth alone, but by how we manage our profits to serve our members’ interests.
We do that by maintaining the high-quality service and excellent value products our members prize today, while also investing in
building new propositions, services, and skills, so we can meet members’ future needs.”
Mark Rennison, Chief Financial Officer, Nationwide Building Society, said:
“These results show that Nationwide is built to last and continues to provide a secure home for members’ money. Trading was
strong in the first six months and we have strengthened our CET 1 capital ratio to 31.7%, and UK leverage ratio to 5.0%. This
performance gives us the confidence to increase our investment in our future, which will allow us to pursue new opportunities for
the benefit of our members. As a building society we do not aim to maximise profit and our decision to increase investment was in
the full knowledge that it would impact on our profitability. If we exclude the charge we’ve recognised for asset write-offs and
incremental technology spend, profits are in line with last year and we have held costs flat while servicing rising business volumes.
We have continued to make the Society more efficient and are not only on track to deliver our targeted sustainable saves but have
also set a more ambitious target for saves by 2023.
“As a mutual we take decisions on rates that are in the long-term interests of our membership, rather than pursuing short-term
gain. We anticipate this, and the competitive market, will lead to further pressure on margins in the second half of the year. Despite
the uncertain political and economic environment, our financial strength gives us confidence that we can continue to be there for
our members in the months and years ahead in the same way that we have always been.”
1© GfK 2018, Financial Research Survey (FRS), 12 months ending 30 September 2018 and 12 months ending 31 March 2018, proportion of extremely/very satisfied customers minus
proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account
market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
4 of 80Nationwide Building Society – Interim Results
Financial summary
Half year to Half year to
30 September 30 September
2018 2017
Financial performance £m £m
Total underlying income 1,590 1,639
Underlying profit before tax (note i) 460 589
Statutory profit before tax 516 628
Mortgage lending £bn % £bn %
Group residential – gross/market share (note ii) 17.3 12.9 16.7 13.2
Group residential – net/market share (note ii) 3.6 13.7 3.9 15.2
% %
Average loan to value of new business (by value) 71 71
Deposit balances £bn % £bn %
Member deposits balance movement/market share (notes ii and iii) 5.1 17.9 1.8 4.5
Key ratios % %
Cost income ratio – underlying basis (note i) 69.2 58.9
Cost income ratio – statutory basis 67.2 57.7
Net interest margin 1.27 1.34
30 September 5 April 4 April
2018 2018 2018
(note iv)
Balance sheet £bn % £bn % £bn %
Total assets 238.3 228.9 229.1
Loans and advances to customers 195.0 191.5 191.7
Member deposits/market share (notes ii and iii) 153.1 10.1 148.0 10.0 148.0 10.0
Asset quality % %
Residential mortgages
Proportion of residential mortgage accounts 3 months+ in arrears 0.42 0.43
Average indexed loan to value (by value) 56 56
Consumer banking
Proportion of customer balances with amounts past due more than
3 months (excluding charged off balances) (note v) 1.53 1.56
Key ratios % % %
Capital
Common Equity Tier 1 ratio (note vi) 31.7 30.4 30.5
UK leverage ratio (note vii) 5.0 4.9 4.9
CRR leverage ratio (note viii) 4.6 4.6 4.6
Other balance sheet ratios
Liquidity coverage ratio 131.9 130.3
Wholesale funding ratio (note ix) 28.6 28.2
Notes:
i. Underlying profit represents management’s view of underlying performance. In order to provide a more meaningful presentation of performance the following
items are excluded from statutory profit to arrive at underlying profit:
a. FSCS costs arising from institutional failures
b. Gains from derivatives and hedge accounting.
Comparatives have been restated to reflect changes to the definition of underlying profit. Further information can be found in the Financial review.
ii. The calculation of market share for mortgage lending and deposit balances has been refined to better reflect the position at the reporting date, with comparatives
restated accordingly. Market data is available at calendar month ends and therefore market share for the half year is for the period 1 April to 30 September.
iii. Member deposits include current account credit balances.
iv. Balances as at 5 April 2018 reflect the impact of applying IFRS 9: Financial Instruments. Further information can be found in note 2 to the Financial statements.
v. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months,
depending on the product) whilst recovery procedures take place.
vi. The Common Equity Tier 1 (CET1) ratio has been calculated under CRD IV on an end point basis. For 30 September 2018 and 5 April 2018, IFRS 9 transitional
arrangements have been applied.
vii. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves
from the leverage exposure measure. For 30 September 2018 and 5 April 2018, IFRS 9 transitional arrangements have been applied.
viii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition
of the exposure measure and is reported on an end point basis. For 30 September 2018 and 5 April 2018, IFRS 9 transitional arrangements have been applied.
ix. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).
5 of 80Nationwide Building Society – Interim Results
Chief Executive’s review
Our purpose, building society, nationwide, describes our aspirations to grow the Society for the benefit of our members, customers,
colleagues, and society more generally. It is underpinned by five strategic cornerstones that describe what we aim to do and how
we will do it.
Built to last – strong finances and a low risk profile
We are financially stronger than ever, with our UK leverage ratio at 5.0%, and our CET1 capital ratio at 31.7%. Our loan book remains
low risk, with the average loan to value ratio for new lending stable at 71%.
Our financial and trading strength has put us in a very strong position to increase investment in technology by £1.3 billion, taking
our total planned investment in the Society to £4.1 billion in the coming five years. This investment will impact profitability over the
medium term. Underlying profit for H1 2018/19 of £460 million (H1 2017/18: £589 million) is in line with our expectations and
includes a charge of £135 million associated with this investment. Excluding this charge, profits are in line with last year and we
delivered flat costs of £965 million (H1 2017/18: £966 million).
As we’ve said in the past, our aim is not to maximise profits, but manage our profits in our members’ interests – through a balance
of maintaining our financial strength, rewarding members, and investing to meet their future needs. We have consciously continued
to protect savers and reward loyal members in the first half of the year which has reduced margins, in line with expectations. We
expect this to continue into the second half of the year as we balance the needs of our members in a competitive market.
Building thriving membership – attracting more people to mutuality
We continue to be true to our founding purpose of helping people into homes of their own: record numbers of first time buyers
chose a mortgage with Nationwide, benefiting from a package that includes £500 cashback and a free valuation. We’re testing a
retirement interest only mortgage with our members alongside our existing equity release mortgage for people in later life. We’ve
made it quicker and easier for members to remortgage online and also enhanced our buy-to-let proposition. As a result, our gross
prime mortgage lending was broadly in line with last year at £15.2 billion (H1 2017/18: £15.0 billion). We increased gross buy-to-let
lending to £2.1 billion (H1 2017/18: £1.7 billion).
We continued to reward members by launching good value products including our Loyalty ISA and a new children’s account, with
rates of up to 3.5%. Our commitment to supporting savers helped us increase member deposits by £5.1 billion (H1 2017/18: £1.8
billion) and meant that, over the past six months, we attracted almost 18% of the growth in deposits in the UK (H1 2017/18: 4.5%).
We also rewarded members with £250 million additional deposit interest (H1 2017/18: £180 million), with average deposit rates
more than 50% higher than the market average1.
More people chose to open a current account with us in the first half of the year than with any other high street brand2, and we
attracted more than one in five current account switchers3. Our stock of all current accounts continues to grow and now stands at
7.6 million and we’ve grown our share of main standard and packaged current accounts from 6% five years ago to around 8%
today.
Building legendary service – number 1 for service and trust
The quality of our service is a fundamental part of our relationship with our members. We believe it’s a major factor in attracting
new members and keeping existing ones, which is why we work hard to give our members outstanding service whenever they
engage with us. We have been number 1 for customer satisfaction among our high street peer group for more than six years4 and
are recognised as the most trusted financial brand in the UK5. We also improved our performance in the Institute of Customer
Service’s UK Customer Satisfaction Index from joint seventh to joint fifth between January and July 2018.
We know that members’ expectations of service are constantly rising, and we must rise to meet them. This was an important factor
in our decision to invest in our technology for the future. However, we know our members value the personal service they get in
branches, which is why our £4.1 billion investment also includes £350 million to enhance our branch network.
1 Market average interest rates are based on Bank of England whole of market average interest rates, adjusted to exclude Nationwide’s balances.
2 Sources: CACI (Apr-Aug 2018) and eBenchmarkers (Apr-Sep 2018).
3 Source: CASS BACS Payments Schemes monthly CASS switching market data (Apr-Sep 2018).
4 © GfK 2018, Financial Research Survey (FRS), lead held over period 12 months ending 31 March 2013 to 12 months ending 30 September 2018. Each monthly data point contains customer
feedback referring to previous 12 months. Proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account,
mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB). Prior
to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to Apr 15), NatWest and
Santander).
5 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 12 months ending September 2018. Financial brands
included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
6 of 80Nationwide Building Society – Interim Results
Chief Executive’s review (continued)
Building PRIDE – recognising and investing in our people
Everything we achieve as a Society is down to the hard work and commitment of our colleagues. We place great importance on the
culture of the Society and the behaviours and values that underpin it; Nationwide believes fundamentally in inclusion and was proud
to be one of the first businesses to sign the Race at Work Charter.
As part of our technology investment we will be creating up to 1,000 new roles.
Building a national treasure – reflecting the social purpose that lies at the heart of our mutuality
We continue to invest in our communities through our social investment programme. We’ve moved from pilot to implementation
in our £20 million, five-year community funding programme, which centres on helping people into a place fit to call home, with 34
projects chosen by our members receiving a total of almost £1 million in the last six months. In Swindon, we continue to work in
partnership with the borough council to help to develop a community of up to 250 homes. We are committed to help raise standards
in the private rented sector, confirming our support for indefinite tenancies in the government’s consultation. In October, we
launched our Open Banking for Good challenge to find solutions to financial capability issues using the functionality of Open Banking.
Outlook
Looking ahead, the economic outlook remains mixed. While the UK economy has continued to grow, with employment at or close
to historic highs and wages rising in real terms, obvious challenges remain. Most notably uncertainties, including those surrounding
Brexit, appear to be holding back investment and dampening activity in the housing market. Despite this, we expect the economy
to grow in the quarters ahead – more slowly at first, and at a faster pace as the level of uncertainty eases. We expect the housing
market to mirror trends in the wider economy. Against this backdrop, the Society is strong and secure, with a growing membership
and business, and is well placed to support our members with the products and services they need to manage their financial lives.
7 of 80Nationwide Building Society – Interim Results
Financial review
In summary
As the world’s largest building society, Nationwide’s aim is to strike a balance between the value we return Underlying profit:
to members through good value products and services, the profits we retain to fund future growth and £460m
sustain strong capital ratios and the level of investment that we make for the benefit of members. We (H1 2017/18:
therefore do not aim to maximise profit. £589m)
Decisions to distribute value to members, invest in the Society and retain profits are guided by our Financial
Performance Framework. We remain committed to this framework and expect to continue our recent track Statutory profit:
record of improving capital ratios, excluding the impact of any capital calls we choose to make and proposed £516m
regulatory changes. (H1 2017/18:
£628m)
Trading performance for the period has been robust with one of the strongest ever gross lending
performances in the first half of the financial year at £17.3 billion (H1 2017/18: £16.7 billion), and a growth in
member deposits of £5.1 billion (H1 2017/18: £1.8 billion), as we continued to offer our members competitive
products. UK leverage ratio:
5.0%
Underlying profit for the period has reduced by 22% to £460 million (H1 2017/18: £589 million). This is (4 April 2018:
principally due to a charge of £135 million driven by asset write-offs and additional investment in technology, 4.9%)
in line with our recent technology strategy announcement.
We continue to make good progress on our efficiency programme and are on track to deliver £100 million of
sustainable saves this year. To date we have delivered over half our previous target of £300 million of
sustainable saves by 2022 and have now revised our target to £500 million to be delivered by 2023.
Nationwide’s UK leverage ratio is 5.0%, well in excess of current and anticipated regulatory requirements.
On 5 April 2018 we implemented IFRS 9: Financial Instruments. The total impact on members’ interests and
equity, net of deferred tax, was a reduction of £162 million. There has been no restatement of comparatives
following adoption of IFRS 9. Where useful for the interpretation of balances or movements, we have
highlighted the impact on the Group’s balance sheet and members’ interests and equity at 5 April 2018.
8 of 80Nationwide Building Society – Interim Results
Financial review (continued)
Income statement
Underlying and statutory results Half year to Half year to Net Interest
30 September 2018 30 September 2017 Margin: 1.27%
£m £m (H1 2017/18:
Net interest income 1,495 1,514 1.34%)
Net other income 95 125
Total underlying income 1,590 1,639
Underlying administrative expenses (1,100) (966) Underlying Cost
Impairment losses (note i) (45) (59) Income Ratio:
Underlying provisions for liabilities and charges 15 (25) 69.2%
Underlying profit before tax (note ii) 460 589 (H1 2017/18:
Financial Services Compensation Scheme (FSCS) 9 3 58.9%)
Gains from derivatives and hedge accounting
47 36
(note iii) Statutory Cost
Statutory profit before tax 516 628 Income Ratio:
Taxation (129) (157) 67.2%
Profit after tax 387 471 (H1 2017/18:
57.7%)
Notes:
i. Under IFRS 9, the recognition and measurement of expected credit losses differs from under IAS 39. As prior period amounts have not been restated, impairment
losses on loans and advances in the comparative period remain in accordance with IAS 39 and are therefore not directly comparable with impairment losses
recorded for the current period.
ii. Underlying profit represents management’s view of underlying performance. In order to provide a more meaningful presentation of performance the following
items are excluded from statutory profit to arrive at underlying profit:
FSCS costs arising from institutional failures, which are included within provisions for liabilities and charges.
Gains from derivatives and hedge accounting, which are presented separately within total income.
iii. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge
accounting is either not applied or is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the
hedging strategy.
The components of underlying profit have been changed in the period to reflect more appropriately ongoing business performance.
Underlying profit now includes the bank levy and FSCS management expenses, which were previously excluded. The impact of this
change at the half year is not significant, with H1 2017/18 comparatives restated to increase the previously reported underlying profit
by £1 million to £589 million. The impact of this change for the full financial year will be more significant, as the bank levy expense
(£45 million in 2017/18), which is incurred in the second half of the year, will be reported within underlying profit.
Total income and margin
Net interest margin for the period was 1.27% compared to 1.34% for H1 2017/18 and 1.31% for our last full financial year. Gradual
pressure on margin continues to be driven by intense competition in retail lending markets generally, and particularly in relation to
both prime and buy to let mortgages. Attractive new business pricing, combined with a base rate change in the period, has
encouraged product switching and refinancing, with £10.5 billion of prime mortgage customer balances switching to a new
Nationwide product in the period (H1 2017/18: £8.7 billion) and legacy base mortgage rate (BMR) balances continuing to run off.
BMR balances at 30 September 2018 were £20.7 billion (30 September 2017: £26.3 billion; 4 April 2018: £22.7 billion).
The decline in mortgage margins has been only partially offset by a reduction in our cost of funding as we have continued to manage
savings pricing in line with our commitment to provide good long-term value for members. During the period depositors have
continued to earn average rates more than 50% higher than market average1.
Net other income has decreased to £95 million (H1 2017/18: £125 million), predominantly due to the prior period including a one-
off gain of £26 million from the sale of our investment in VocaLink.
1 Market average interest rates are based on Bank of England whole of market average interest rates, adjusted to exclude Nationwide’s balances.
9 of 80Nationwide Building Society – Interim Results
Financial review (continued)
Member financial benefit
We provide value to members through the highly competitive mortgage, savings and banking products that we offer as a direct
result of being a member-owned business. The calculation method used to quantify member financial benefit is described in full in
the Financial review section of the Annual Report and Accounts 2018. In summary, we quantify the financial benefit of being a
member by comparing the following to industry benchmarks:
interest rates on mortgages, unsecured lending and retail deposits; and
the fees we charge and incentives we provide to members.
During the period we have provided members with a financial benefit of £330 million (H1 2017/18: £245 million), including £250
million (H1 2017/18: £180 million) relating to higher interest paid to depositors. In addition, since making personal loans a member
only proposition, we have increased the level of member financial benefit by offering our lowest ever rates. This reflects our ongoing
commitment to delivering long-term value to members despite strong levels of competition in our core markets.
Administrative expenses
Administrative expenses include the impact of incremental expenditure and write-offs associated with our recent Technology
Strategy announcement. The strategy incorporates £1.3 billion of incremental expenditure to be incurred over 5 years targeting the
simplification of our technology estate alongside investment in digital service and data capabilities. During the period we have
recognised a charge of £135 million comprising direct expenditure of £31 million in connection with the programme and asset write-
offs and impairments of £104 million.
Excluding this charge, the remainder of our cost base at £965 million was flat by comparison with £966 million reported in H1
2017/18. Our continued focus on efficiency has allowed us to absorb inflation, volume growth and the impact of prior year
investment. We are on track to deliver £100 million of in year sustainable saves and have now delivered over half of our original
target of £300 million sustainable saves by 2022; we have therefore revised our target to £500 million sustainable saves by 2023.
Following a recent High Court case concerning industry-wide inequalities in the calculation of Guaranteed Minimum Pensions (GMP),
a one-off charge is expected to be recognised in the second half of the year in respect of past service costs. The exact impact is
currently being assessed but is not expected to be material. Further details are included in note 24.
Impairment losses on loans and advances to customers
Impairment losses have decreased by £14 million to £45 million (H1 2017/18: £59 million) largely due to the prior period including
additional retail impairments from updates to provision assumptions to reflect economic conditions.
Half year to Half year to
Impairment losses / (reversals) 30 September 2018 30 September 2017
£m £m
Residential lending 4 12
Consumer banking 38 52
Retail lending 42 64
Commercial and other lending 3 (5)
Impairment losses on loans and advances 45 59
Note:
Under IFRS 9, the recognition and measurement of expected credit losses differs from under IAS 39. As prior period amounts have not been restated, impairment
losses in the comparative period are therefore not necessarily comparable to impairment losses recorded for the current period.
Provisions for liabilities and charges
We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products
and post sales administration, including compliance with consumer credit legislation and other regulatory requirements. During the
period there has been a release of £15 million (H1 2017/18: £25 million charge), reflecting latest estimates of the liabilities. More
information is included in note 17.
10 of 80Nationwide Building Society – Interim Results
Financial review (continued)
Taxation
The tax charge for the period of £129 million (H1 2017/18: £157 million) represents an effective tax rate of 25.1% (H1 2017/18: 25.0%)
which is higher than the statutory UK corporation tax rate of 19% (H1 2017/18: 19%). The effective tax rate is higher due to the
banking surcharge, equivalent to £25 million (H1 2017/18: £33 million), and the effect of non-taxable customer redress releases and
disallowable expenses of £1 million credit and £7 million charge respectively (H1 2017/18: £1 million charge and £4 million charge).
Further information is provided in note 9.
Balance sheet
Total assets have increased by £9.2 billion during the period to £238.3 billion (4 April 2018: £229.1 billion) with £3.6 Liquidity
billion of net mortgage lending (H1 2017/18: £3.9 billion). Mortgage lending has been funded by a strong growth in coverage ratio:
retail deposit balances, with member deposits growing by £5.1 billion to £153.1 billion (4 April 2018: £148.0 billion) 131.9%
and our market share of UK deposits increasing to 10.1% (31 March 2018: 10.0%). Of the growth in member deposits, (4 April 2018:
£1.9 billion is attributable to current account balances, with our share of current account switchers increasing to 130.3%)
21.5% during the period (H1 2017/18: 20.2%).
Assets 30 September 5 April 2018 4 April 2018
2018 (note i)
£m % £m % £m %
Residential mortgages (note ii) 180,967 93 177,303 177,299 92
Commercial and other lending 10,369 5 10,711 10,716 6
Consumer banking 4,316 2 4,107 4,107 2
195,652 100 192,121 192,122 100
Impairment provisions (635) (629) (458)
Loans and advances to customers 195,017 191,492 191,664
Other financial assets 40,373 34,806 34,841
Other non-financial assets 2,946 2,639 2,593
Total assets 238,336 228,937 229,098
Asset quality
Residential mortgages (note ii): % %
Proportion of residential mortgage accounts 3 months+ in arrears 0.42 0.43
Average indexed loan to value (by value) 56 56
Consumer banking:
Proportion of customer balances with amounts past due more than 3
months (excluding charged off balances) (note iii) 1.53 1.56
Notes:
i. Balances as at 5 April 2018 reflect the impact of applying IFRS 9: Financial Instruments.
ii. Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let lending.
iii. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months,
depending on the product) whilst recovery procedures take place.
Residential mortgages
Total gross mortgage lending during the period has increased to £17.3 billion (H1 2017/18: £16.7 billion), of which gross prime
lending increased to £15.2 billion (H1 2017/18: £15.0 billion) and gross specialist lending increased to £2.1 billion (H1 2017/18: £1.7
billion). This represents one of our strongest gross lending performances in the first half of a financial year, reflecting the
competitively priced products and good long-term value that we continue to offer members.
Net mortgage lending was £3.6 billion (H1 2017/18: £3.9 billion) largely driven by a rise in redemptions due to sustained market
competition.
Arrears performance improved marginally during the period, with cases more than three months in arrears improving to 0.42% of
the total portfolio (5 April 2018: 0.43%). Impairment provisions have remained largely unchanged at £234 million (5 April 2018:
£235 million).
11 of 80Nationwide Building Society – Interim Results
Financial review (continued)
Commercial and other lending
During the period commercial and other lending balances decreased by £0.3 billion to £10.4 billion (5 April 2018: £10.7 billion).
Given deleveraging activity in previous financial years, the overall portfolio is increasingly weighted towards registered social
landlords, with balances of £6.5 billion (5 April 2018: £6.8 billion). Commercial real estate balances decreased by £0.2 billion during
the period to £1.6 billion (5 April 2018: £1.8 billion) as we actively reduced this portfolio. Impairment provisions have remained
stable at £30 million (5 April 2018: £29 million).
Consumer banking
The asset quality of the portfolio remains strong. Impairment provisions have increased to £371 million (5 April 2018: £365 million),
as a result of book growth.
Other financial assets
Other financial assets total £40.4 billion (5 April 2018: £34.8 billion), primarily comprising liquidity and investment assets held by
our Treasury function of £36.0 billion (5 April 2018: £30.8 billion) and derivatives with positive fair values of £4.5 billion
(5 April 2018: £4.1 billion). Derivatives relate primarily to interest rate and foreign exchange contracts which economically hedge
financial risks inherent in core lending and funding activities.
The Liquidity Coverage Ratio has increased to 131.9% (4 April 2018: 130.3%) largely due to strong member deposit inflows increasing
the liquid asset buffer.
Members’ interests, equity and liabilities 30 September 2018 5 April 2018 4 April 2018
(note i)
£m £m £m
Member deposits 153,071 148,003 148,003
Debt securities in issue 35,253 34,118 34,118
Wholesale
Other financial liabilities 35,860 33,173 33,173
funding ratio:
Other liabilities 1,523 1,402 1,401
28.6%
Total liabilities 225,707 216,696 216,695
(4 April 2018:
Members’ interests and equity 12,629 12,241 12,403
28.2%)
Total members’ interests, equity and liabilities 238,336 228,937 229,098
Note:
i. Balances as at 5 April 2018 reflect the impact of applying IFRS 9: Financial Instruments.
Member deposits
Member deposits have increased by £5.1 billion to £153.1 billion (4 April 2018: £148.0 billion) as we continue to offer competitive
savings and current account propositions which provide good long-term value. We have continued to attract inflows from both new
and existing members through the introduction of successful products such as our Single Access ISA and Loyalty ISA. Nationwide’s
share of the balance growth in the UK deposit market for the period is 17.9% (H1 2017/18: 4.5%).
Of this balance growth, £1.8 billion relates to net inflows into current account products, with in-credit balances on those accounts
amounting to £21.6 billion (4 April 2018: £19.8 billion). During the period our share of current account switchers increased to 21.5%
(H1 2017/18: 20.2%).
Debt securities in issue and other financial liabilities
Debt securities in issue of £35.3 billion (5 April 2018: £34.1 billion) are used to raise funding in wholesale markets to finance core
activities. Other financial liabilities have increased by £2.7 billion to £35.9 billion (5 April 2018: £33.2 billion) as a result of capital
funding issuances and liquidity financing transactions. Further details are included in the Liquidity and funding risk section of the
Business and risk report.
Members’ interests and equity
The more significant movements in the period are retained profit after tax, net remeasurement of pension obligations and the impact
of adopting IFRS 9: Financial Instruments at 5 April 2018. Further details on the impact of transition to IFRS 9 are included in note 2.
12 of 80Nationwide Building Society – Interim Results
Financial review (continued)
Statement of comprehensive income
Half year to Half year to
30 September 2018 30 September 2017
(note i) £m £m
Profit after tax 387 471
Net remeasurement of pension obligations 155 71
Net movement in cash flow hedge reserve (65) (114)
Net movement in available for sale reserve (10) (15)
Total comprehensive income 467 413
Note:
i. Movements are shown net of the related taxation.
Further information on gross movements in the pension obligation and movements in the cash flow hedge reserve are included in
notes 19 and 6 respectively.
Capital structure
Capital resources have continued to strengthen during the period with the CET1 ratio increasing to 31.7% (4 April 2018: 30.5%) and
the UK leverage ratio to 5.0% (4 April 2018: 4.9%). Both are comfortably in excess of minimum regulatory capital requirements and
Nationwide’s strategic target of maintaining a UK leverage ratio of greater than 4.5%.
Capital structure 30 September 2018 5 April 2018 4 April 2018
(note iv)
(note i) £m £m £m
Capital resources
Common Equity Tier 1 (CET1) capital 10,423 9,915 9,925
Total Tier 1 capital 11,415 10,907 10,917
Total regulatory capital 14,511 13,930 13,936
Risk weighted assets (RWAs) 32,868 32,579 32,509
UK leverage exposure 227,646 221,982 221,992
CRR leverage exposure 246,193 236,458 236,468
CRD IV capital ratios: % % %
CET1 ratio 31.7 30.4 30.5
UK leverage ratio (note ii) 5.0 4.9 4.9
CRR leverage ratio (note iii) 4.6 4.6 4.6
Notes:
i. Data in the table is reported under CRD IV on an end point basis with IFRS 9 transitional arrangements applied.
ii. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves
from the leverage exposure measure.
iii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition
of the exposure measure and is reported on an end point basis. Further details are provided in the Solvency risk section of the Business and risk report.
iv. Figures have been adjusted to reflect the impact of applying IFRS 9 from 5 April 2018. Further information is provided in the Report on Transition to IFRS 9:
Financial Instruments, which can be found at nationwide.co.uk.
CET1 capital resources have increased by £0.5 billion since 5 April 2018, primarily due to profit after tax for the period of £387
million and net remeasurement of pension obligations of £155 million. Risk weighted assets (RWAs) have remained relatively stable
with a reduction in commercial exposures being offset by increases for counterparty credit risk and other exposures. These
movements have resulted in the CET1 ratio increasing to 31.7%.
Lending growth has been more than offset by profits for the period, with Tier 1 resources growing more quickly than leverage
exposure. This resulted in the UK leverage ratio increasing to 5.0%. CRR leverage ratio has remained stable at 4.6%.
Detailed information on Nationwide’s capital instruments can be found within the Interim Pillar 3 Disclosure 2018, at
nationwide.co.uk
13 of 80Nationwide Building Society – Interim Results
Business and risk report
Contents
Page
Introduction 15
Principal risks 15
Top and emerging risks 15
Credit risk
- Overview 16
- Residential mortgages 19
- Consumer banking 27
- Commercial and other lending 30
- Treasury assets 34
Liquidity and funding risk 38
Solvency risk 43
Pension risk 46
Operational risk 46
Conduct and compliance risk 46
14 of 80Nationwide Building Society – Interim Results
Introduction
This report provides information on developments during the period in relation to Nationwide’s business, the risks it is exposed to
and how it manages those risks. This information supports, and should be read in conjunction with, the material found in the
Business and Risk Report in the Annual Report and Accounts 2018. Where there has been no change to the approach to managing
risks, or there has been no material change to the relevant risk environment from that disclosed at year end, this information has
not been repeated in the 2018/19 Interim Results.
Principal risks
Effective risk management is fundamental to the success of Nationwide’s business and has an important part to play in delivering
the Society’s purpose of building society, nationwide, by making sure it is safe and secure for the future. Whilst it is accepted that
all business activities involve some degree of risk, Nationwide seeks to protect its members by managing appropriately the risks that
arise from its activities. The principal types of risk inherent within the business remain unchanged from those set out in the Business
and risk report in the Annual Report and Accounts 2018, namely:
Credit risk Model risk
Liquidity and funding risk Conduct and compliance risk
Solvency risk Market risk
Pension risk Business risk
Operational risk
Information on key developments and updated quantitative disclosures for the principal risks above are included within this report
except for model risk, business risk and market risk where there have been no significant developments during the period.
Top and emerging risks
The top and emerging risks to the delivery of Nationwide’s strategy are identified through the processes outlined in the Business
and risk report section of the Annual Report and Accounts 2018. These top and emerging risks to Nationwide’s strategy are
summarised in the table below, along with details of key movements and developments during the period.
Risk Update
Cyber security - The risk that customer services are disrupted We have seen an increase in the frequency and sophistication of
or data is lost through a failure to protect against a cyber attacks being made against the Society. This is not unique
sophisticated ransomware, malware or Distributed Denial of to Nationwide, and reflects the increased activity, sophistication
Service (DDoS) attack. and severity of attacks across the UK. We continue to evaluate
our cyber security and resilience against the emerging threat
landscape, updating our defensive capabilities accordingly.
Operational resilience - The risk that our systems and Operational resilience is a key concern for our members, and
processes are unable to cope with increased customer remains a challenge across the industry. We continued to
demand for digital, ‘always-on’ services, and we are unable monitor operational resilience closely in the first half of the year.
to provide stable and resilient services to our members.
In September, we announced an increase in investment in the
Society of £1.3 billion, taking our total planned investment to £4.1
billion over the next five years. This investment will allow us to
simplify our existing technology infrastructure, further improving
our efficiency and resilience, whilst delivering new technologies
to support future growth and the service we offer to members.
Regulatory change - The risk that we are unable to comply Regulation has continued to evolve over the first half of the year;
with complex changes required by regulation which come however, there has been no material change to the overall
into force. regulatory environment and Nationwide’s response as disclosed
in the Annual Report and Accounts 2018.
Competitive environment - The risk that we fail to respond to Whilst pressure in the competitive environment remains
changes in our core markets driven by new technologies, heightened, there have been no material changes from the
regulation, or changing consumer behaviour, affecting our position disclosed in the Annual Report and Accounts 2018.
ability to deliver the legendary service and quality products
our members expect.
Geopolitical and macro-economic environment - The risk that Whilst economic conditions have thus far remained stable,
our borrowers are unable to repay the money they owe us as significant potential economic headwinds remain in the
a result of changes in the wider economy, caused by events environment as we head towards the Brexit date of 29 March
such as Brexit, or other economic or political factors. 2019. We continue to monitor closely and plan proactively for the
possibility of a disorderly Brexit, assessing the impacts on
Nationwide and the mitigating actions available to the Society
across a range of potential scenarios.
15 of 80Nationwide Building Society – Interim Results
Credit risk – Overview
Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk
also encompasses concentration risk and refinance risk.
Nationwide manages credit risk for each of the following portfolios:
Portfolio Definition
Residential mortgages Loans secured on residential property
Consumer banking Unsecured lending including current account overdrafts, personal loans and credit cards
Commercial and other Loans to registered social landlords, loans made under the Private Finance Initiative and commercial
lending real estate lending. Also includes deferred consideration and collateral balances to support repurchase
transactions.
Treasury Treasury liquidity, derivatives and discretionary portfolios
With effect from 5 April 2018 Nationwide has adopted IFRS 9: Financial Instruments which replaces IAS 39 Financial Instruments:
Recognition and Measurement. Under IFRS 9, impairment provisions on financial assets are calculated on an expected credit loss
(ECL) basis for assets held at amortised cost and fair value through other comprehensive income (FVOCI). ECL impairment provisions
are based on an assessment of the probability of default, exposure at default and loss given default, discounted to give a net present
value. The Credit risk section of this report summarises for portfolios:
the maximum exposure to credit risk;
the stage distribution of loans and provisions (explained on page 18);
credit quality;
other risk factors and concentrations, including loan to values, regional exposures, arrears and forbearance.
Further information on the move to IFRS 9 is provided in our Report on Transition to IFRS 9: Financial Instruments, which can be
found on nationwide.co.uk
In the consolidated interim financial statements there has been no restatement of comparative information for the year ended 4
April 2018, which is reported on an IAS 39 basis. However, to support the understanding of the current year IFRS 9 disclosures,
certain comparative balances within the Credit risk section of this Business and risk report are shown as at 5 April 2018 (the effective
date of the adoption of IFRS 9). These 5 April 2018 comparatives include financial asset balance sheet carrying values that have
been changed by IFRS 9, and the stage distribution of gross lending and ECL provisions.
The stage distribution of gross lending and provisions for loans and advances to customers is presented for assets held at amortised
cost, and certain tables below therefore exclude loans and advances to customers classified as fair value through profit or loss
(FVTPL).
The table below shows the classification of assets on the Group’s balance sheet following the adoption of IFRS 9.
Classification and measurement 30 September 2018 5 April 2018 4 April 2018
(IFRS 9 basis) (IFRS 9 basis) (IAS 39 basis)
£m £m £m
Loans and advances to customers – Amortised cost (note i) 194,771 191,245 191,664
Loans and advances to customers – FVTPL 246 247 -
Investment securities – FVOCI 12,415 11,881 11,926
Investment securities – Amortised cost (note i) 1,748 1,120 1,120
Investment securities – FVTPL 61 45 -
Fair value adjustment for portfolio hedged risk (204) (144) (109)
Note:
i. Balances are stated net of impairment provisions.
16 of 80Nationwide Building Society – Interim Results
Credit risk – Overview (continued)
Maximum exposure to credit risk
Maximum exposure to credit risk 30 September 2018
Gross Less: Carrying Commitments Maximum % of total
balances impairment value (note i) credit risk credit risk
provisions exposure exposure
£m £m £m £m £m %
Amortised cost loans and advances to customers:
Residential mortgages 180,778 (234) 180,544 12,768 193,312 78
Consumer banking 4,316 (371) 3,945 27 3,972 2
Commercial and other lending (note ii) 9,347 (30) 9,317 987 10,304 4
Fair value adjustment for micro hedged risk (note ii) 965 - 965 - 965 -
195,406 (635) 194,771 13,782 208,553 84
FVTPL loans and advances to customers:
Residential mortgages (note iii) 189 - 189 - 189 -
Commercial and other lending 57 - 57 - 57 -
246 - 246 - 246 -
Other items:
Cash 18,423 - 18,423 - 18,423 7
Loans and advances to banks 3,396 - 3,396 - 3,396 1
Investment securities – FVOCI 12,415 - 12,415 - 12,415 5
Investment securities – Amortised cost 1,748 - 1,748 - 1,748 1
Investment securities – FVTPL 61 - 61 - 61 -
Derivative financial instruments 4,534 - 4,534 - 4,534 2
Fair value adjustment for portfolio hedged risk (note ii) (204) - (204) - (204) -
40,373 - 40,373 - 40,373 16
Total 236,025 (635) 235,390 13,782 249,172 100
Maximum exposure to credit risk 5 April 2018
Gross Less: Carrying Commitments Maximum % of total
balances impairment value (note i) credit risk credit risk
provisions exposure exposure
£m £m £m £m £m %
Amortised cost loans and advances to customers:
Residential mortgages 177,114 (235) 176,879 12,205 189,084 79
Consumer banking 4,107 (365) 3,742 42 3,784 2
Commercial and other lending (notes ii and iv) 9,611 (29) 9,582 943 10,525 4
Fair value adjustment for micro hedged risk (note ii) 1,042 - 1,042 - 1,042 -
191,874 (629) 191,245 13,190 204,435 85
FVTPL loans and advances to customers:
Residential mortgages (note iii) 189 - 189 - 189 -
Commercial and other lending 58 - 58 - 58 -
247 - 247 - 247 -
Other items:
Cash 14,361 - 14,361 - 14,361 6
Loans and advances to banks (note iv) 3,422 - 3,422 - 3,422 1
Investment securities – FVOCI 11,881 - 11,881 - 11,881 5
Investment securities – Amortised cost 1,120 - 1,120 700 1,820 1
Investment securities – FVTPL 45 - 45 - 45 -
Derivative financial instruments 4,121 - 4,121 - 4,121 2
Fair value adjustment for portfolio hedged risk (note ii) (144) - (144) - (144) -
34,806 - 34,806 700 35,506 15
Total 226,927 (629) 226,298 13,890 240,188 100
Notes:
i. In addition to the amounts shown above, Nationwide has, as part of its retail operations, revocable commitments of £9,700 million (5 April 2018: £9,517 million)
in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such
commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of
exposure.
ii. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio)
represent hedge accounting adjustments. They are indirectly exposed to credit risk through the relationship with the underlying loans covered by Nationwide’s
hedging programmes.
iii. FVTPL residential mortgages includes equity release loans.
iv. Comparative values for commitments have been restated to reclassify the commitment value in respect of one counterparty from loans and advances to banks
to commercial and other lending.
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